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Financial Education 101

How to establish and build credit

6 minute read

You don't just need good credit to qualify for many loans—you need a credit history, period. What can you do if you don't have a credit history? How can you establish and build credit?

One way to establish credit is to apply for a credit card specifically designed to help consumers build credit, such as a secured credit card or a student credit card. Gas station or store cards might also be good options for someone trying to establish a credit history. Opening a credit card account, using it, and then paying your balance off can help you develop a track record of responsible card ownership.

There are additional ways to build a credit history. Read on.

Build Credit History with a Special Credit Card

Applying for a credit card when you don’t have a credit history can feel like a catch-22: it’s hard to qualify for a credit card without a credit history, but you fear you can’t build a history without a credit card. Luckily, there are special credit cards that help you out of this bind.

The first is a secured credit card. To get one of these, you must put down a deposit, anywhere from a few hundred dollars to a thousand or more.1 The credit line is usually equal to the amount you put down, but not always. After putting down a deposit, use it like any other card: pay at least the minimum balance on time each month, if not the full amount. You generally get the deposit back once you close your card and have paid off all the charges.2

Another option is a gas station or store credit card. These cards are offered by particular businesses and only work at that business. They sometimes come with rewards and perks to use at their associated store, but they’re typically easier to qualify for3 than a traditional rewards card, and they can be easier to get for those without a credit history.4

Student credit cards are a third possibility. Of course, you must be a student to qualify, and the credit limit on these cards are normally minimal. This can make it tough to build the kind of credit history you want. That’s because ideally you’ll use no more than 30% of your credit limit, which won’t go far if your line is only a couple hundred dollars.5 But if you’re careful, a student credit card can be a good choice to develop a credit history.

Build Credit History without a Card

If you have trouble getting one of the cards listed above or you don't want to open a credit card, you can take other avenues to build your credit.

Credit-builder loan.

Primarily available from credit unions and community banks, credit-builder loans allow people with poor credit to get a loan. But here's the catch: before you can access the loan money, you have to pay it all back first, with interest. Once you've made all the payments on time, you get the loan money and the interest. Lenders usually report to the three credit reporting bureaus, so with successful loan repayment, you've begun to build your credit.6

Get help from family.

If they're willing, your parents or other family members might be able to cosign a loan or add you to their credit card as an authorized user. Remember that your family member will be on the hook if you don't repay the loan or cover your expenses on the card. Before you go this route, make sure the card you're added to reports authorized user behavior to the credit bureaus.7

Use your rent payments.

Why not build credit with payments you're making anyway? Two of the three credit reporting bureaus, TransUnion8 and Experian9, have programs to incorporate on-time rental payments into a consumer's credit history, and the third, Equifax, might be following suit.10 Your property manager or landlord needs to report the data, but they can use a rental-reporting agency like Rental Kharma or RentTrack.11

Make It Count

Whichever method you choose to start building your credit, make it count by acting responsibly. The biggest factor is whether you make at least your minimum payments on time every month. This accounts for 35%12 of your FICO score (the credit score used by the majority of lenders to determine your future credit risk13). Of course, if you want to avoid fees and interest payments, you should pay your balance in full every month by the payment due date, rather than paying just the minimum required.

Almost as important is how much credit you've used. The best plan is to keep your total amount owed to no more than 30% of your available credit.14 With a credit limit of $500, for example, you should keep your account balance at or below $150. Admittedly, this can be restricting, but the benefit of building good credit is probably worth it. After all, once you have good credit, you'll be more likely to qualify for other loans, including a mortgage.

Look Toward the Future

It should take about six months of on-time payments to establish a good credit history.15 Use just one tactic at a time to make it easier to succeed—for example, open a credit-builder loan, and when that's paid off, get a special credit card such as store credit card or gas card. Monitor your credit score and credit report (these are two separate things) to see your score improve and check for errors. Once you've earned a good credit history, you should be able to qualify for more loans with more favorable terms.

You don't need to carry a balance on a credit card to establish good credit. To the extent possible, pay off your loans as quickly as you can. With time and perseverance, you should start to see your hard work lead to a strong credit history.

Sources:
1 Dratch, Dana (March 2, 2018). "First Credit Card Dilemma: Student Card vs. Secured Card." Creditcards.com, https://www.creditcards.com/credit-card-news/student-credit-card-vs-secured-credit-card.php
2 Hawlk, Kali (Dec. 4, 2018). "How a Secured Card Deposit Relates to Your Credit Line." Credit Karma, https://www.creditkarma.com/credit-cards/i/secured-card-deposit-credit-line/
3 Lockert, Melanie (Dec. 4, 2018). "How do Gas Credit Cards Work?" Credit Karma, https://www.creditkarma.com/credit-cards/i/gas-credit-cards-work/
4 Lockert, Melanie (Dec. 4, 2018). "How do Gas Credit Cards Work?" Credit Karma, https://www.creditkarma.com/credit-cards/i/gas-credit-cards-work/
5 Dratch, Dana (March 2, 2018). "First Credit Card Dilemma: Student Card vs. Secured Card." Creditcards.com, https://www.creditcards.com/credit-card-news/student-credit-card-vs-secured-credit-card.php
6 O'Shea, Bev (April 4, 2018). "What Is a Credit-Builder Loan?" Nerdwallet, https://www.nerdwallet.com/blog/finance/what-is-credit-builder-loan/
7 El Issa, Erin, and Bev O'Shea (Sept. 26, 2017). "How to Build Credit." Nerdwallet, https://www.nerdwallet.com/blog/finance/how-to-build-credit/
8 "Rent Payment Reporting with TransUnion and PayLease Is a ‘No-Brainer' for Property Management Companies and Residents." June 25, 2018. https://www.transunion.com/articles/rent-payment-reporting-with-transunion-paylease-is-a-no-brainer
9 "Build Credit History by Paying Your Rent On Time." Experian.com. http://www.experian.com/rentbureau/rental-payment.html
10 "How to Get Your Rental History to Show on Your Credit Reports." Feb. 12, 2018. Consumer Recovery Network. https://consumerrecoverynetwork.com/question/rental-history-on-credit-reports/
11 El Issa, Erin, and Bev O'Shea (Sept. 26, 2017). "How to Build Credit." Nerdwallet, https://www.nerdwallet.com/blog/finance/how-to-build-credit/
12 "What's in my FICO Scores," https://www.myfico.com/credit-education/whats-in-your-credit-score/, last accessed 1/22/19.
13 "What Is a Credit Score?" https://www.myfico.com/credit-education/credit-scores/, last accessed 1/22/19.
14 Dratch, Dana (Nov. 10, 2017). "7 Ways to Improve Your Credit Score." Bankrate, https://www.bankrate.com/finance/debt/7-simple-ways-improve-credit-score-1.aspx.
15 El Issa, Erin, and Bev O'Shea (Sept. 26, 2017). "How to Build Credit." Nerdwallet, https://www.nerdwallet.com/blog/finance/how-to-build-credit/
*Subject to credit approval. Minimum monthly payments required. See carecredit.com for details.

This content is subject to change without notice and offered for informational use only. You are urged to consult with your individual business, financial, legal, tax and/or other advisors and/or medical providers with respect to any information presented. Synchrony and any of its affiliates, including CareCredit,(collectively, "Synchrony") makes no representations or warranties regarding this content and accept no liability for any loss or harm arising from the use of the information provided. Your receipt of this material constitutes your acceptance of these terms and conditions.
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